A client in the 37% bracket is choosing between a 3.5% muni and a taxable bond. What taxable yield makes them indifferent?

How to answer

Compute the taxable-equivalent yield: muni yield ÷ (1 − marginal tax rate) = 3.5% ÷ (1 − 0.37) = 3.5% ÷ 0.63 ≈ 5.56%. So the client needs more than a 5.56% taxable yield to beat the muni on an after-tax basis. This is central to HNW planning because high-bracket clients frequently find munis more attractive after tax — and for in-state munis you'd also factor in state-tax exemption, pushing the equivalent yield even higher.

Key idea: Taxable-equivalent yield = muni yield ÷ (1 − tax rate).